Are Personal Injury Accident Settlements Taxable?
Money recovered through a personal injury settlement is typically not taxable. This means that if you receive a payout for your medical bills, property damage, or other damages, you do not have to claim the money as income on your tax return.
Compensatory damages recovered through a settlement with an insurance company or other party are not taxed by the Louisiana state government or the federal government. However, there are exceptions to this general rule, including:
- Punitive damages
- Interest on settlements
- Settlements for non-injury-related losses
Understanding Taxes and Your Personal Injury Settlement
When someone is injured because of another party’s negligent, careless, or wrongful actions, the injured person may be able to recover money through a personal injury claim.
Most of the time, a personal injury claim results in a settlement that is negotiated between the plaintiff and the defendant. The case may go to trial if no settlement can be reached, but this is rare. Whether a personal injury payout is received through a settlement or judgment, it is generally not taxable.
Compensatory Damages for Physical Injuries are Not Taxed
If you sustained an injury because of another party’s actions, you may be able to receive compensation for financial losses such as:
- Medical treatments and ongoing medical needs caused by the injury
- Damage to personal property caused in the injurious accident, including vehicle repair costs
- Lost earnings caused by being unable to work because of the injuries
- Reduced earning capacity
You may also be able to recover compensation for personal damages, such as:
- Physical pain
- Suffering
- Emotional distress
- Mental anguish
- Diminished quality of life
- Disfigurement such as scarring or loss of a limb
Many injured people who seek restitution through a personal injury claim worry that a significant amount of their payout will be taken out in taxes; after all, a huge portion of the settlement is often related to their income. While other kinds of cases may be taxed as income, such as wrongful termination lawsuits, injury cases are safe from this kind of taxation.
Punitive Damages are Taxed
Punitive damages or “exemplary damages” are a specific type of supplementary compensation awarded to personal injury plaintiffs for injuries caused by extreme wrongdoing. Per CC Art. 2315, Louisiana courts award punitive damages under one of two conditions:
- The injury was caused by a “wanton or reckless disregard” for other people’s rights or safety
- The injury was caused by drunk driving
A court may award punitive damages to punish an individual or entity for severe negligence or malicious actions that harmed someone. For example, if a company manufactured an extremely dangerous product that severely injured multiple people, the court may order the company to pay punitive damages to the victims. Punitive damages are much less common than compensatory damages.
The Internal Revenue Service (IRS) explains that while most income from personal settlements and lawsuits is not taxable, punitive damages received for an injury are taxed. A personal injury attorney can track where your settlement money comes from and help you identify which awards may be taxable.
Interest on a Settlement is Taxable
Personal injury settlements are not counted as income and do not get taxed. However, the interest on a personal injury settlement is taxed. For example, if you file a car accident injury claim and it takes two years to settle with the insurance company, you may be able to receive interest on the settlement. The interest accrued is reported as “interest income” on your taxes.
Settlements for Non-Physical Injuries May Be Taxed
The specific language used to describe taxation of personal injury settlements differentiates physical injuries from non-physical injuries. If you slip and fall and break your arm, this is a physical injury. Money awarded for this injury and the emotional effects of the injury is not taxable.
However, claims for non-physical harm are taxed. For example, if you file a claim for intentional infliction of emotional distress with no bodily injury and receive a settlement, you will be expected to pay taxes on that award.
Contact our Team for Legal Help if You or a Loved One Were Injured
Most of the time, personal injury settlements are not taxed. If you recover money through a personal injury claim, you do not have to report it as income on your state or federal taxes. However, there are a few exceptions for non-physical injuries, interest from personal injury settlements, and punitive damages.
If you were hurt in a car crash or another incident caused by someone else’s carelessness, contact Laborde Earles Injury Lawyers to discuss your options. We may be able to help you recover compensation for your property damage, medical expenses, physical and mental suffering, and more. We offer free initial consultations, and we take cases on a contingency-fee basis. Call us today to get started.
